Ratings Agency Moody's has warned German life insurers are in for trouble should interest rates remain at record-low levels. Guaranteed returns in long-term contracts become an ever bigger headache.
Moody's Investors Service warned on Thursday the German life insurance industry stood out globally for its heavy exposure to low interest rates. It argued insurers were likely to incur huge losses if yields on capital investment remained at their current level for a long time to come.
Moody's said German insurers would suffer even more from their previous selling of long-term contracts with guaranteed returns for clients.
"The industry will have to book around 6 billion euros ($8.3 billion) of additional reserves at the end of 2013, after 5 billion euros in 2012," agency analyst Benjamin Serra maintained. "The interest rate reserve that German life insurers have recorded since 2011 accelerates recognition of losses in company accounts."
The report noted the vulnerability of German insurers in the sector to prevailing low yields was linked to the historic average guarantees of up to 3.3 percent offered to policy holders.
In addition, it mentioned the risks stemming from the duration gap between assets and liabilities in German contracts, resulting in significant reinvestment problems.
"If interest rates remain at their current level for the next decade, the incremental reserve requirements would grow to between 40 and 90 billion euros by the end of 2023, requiring the industry to use much of its current level of unrealized gains to preserve regulatory solvency," the report argued.
Some domestic life insurers have already introduced new products to cope with the challenge, while others have completely stopped selling new business as hopes for a quick change in interest rates remained extremely low.
hg/kms (Reuters, dpa)